Answer Key for Test 2

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ANSWER KEY FOR TEST 2
DECEMBER 2011
ECON 0110: MACROECONOMICS
DR. KENKEL

25 questions worth 10 points each. Total Points = 250

1.Assume the following data apply to a certain country using 1996 as the base year: YearConsumerNominal
PriceGDP
Index(Trillions)
2005144.912.2
2006155.614.8
2007169.517.5

The growth rate of real GDP between 2005 and 2006 is
a.Less than 5.0%
b.5.0% to less than 6.0%
c.6.0% to less than 7.0%
d.7.0% to less than 8.0%
*e.8.0% or higher
ANSWER: Real GDP in 2005 = (12.2/144.9) x 100 = 8.4196
Real GDP in 2006 = (14.8/155.6) x 100 = 9.5116
Growth rate = (9.5116 – 8.4196)/8.4196 x 100% = 12.97%

2.When Bill’s disposable income is $55,000, his consumption spending is $47,000. Suppose his disposable income increases to $75,000. Suppose his marginal propensity to consume is .70. His new consumption spending will be: a.Less than $52,000

b.from $52,000 to $54,999
c.from $55,000 to $59,999
*d.from $60,000 to $63,999
e.$64,000 or higher
ANSWER: Change in income = $75,000 - $55,000 =$20,000
Change in spending = .70 x ($20,000) = $14,000
New consumption = $47,000 + $14,000 = $61,000

3.Which of the following is true?
a.Value added equals total sales revenue of a firm minus its depreciation. b.Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments are called fringe benefits. c.The three main categories of consumption spending are durable goods, nondurable goods, and stock purchases. d.An inflation that results from an initial increase in business costs is called wage pull inflation. *e.A major cost of highly variable inflation is that it causes extreme uncertainty which discourages long term investment. ANSWER: Value added equals value of sales minus cost of purchases from suppliers. Government payments when no goods or services are received are called TRANSFER payments. Consumption spending consists of spending on durable goods, nondurable goods, and services. Inflation resulting from an increase in business costs is called COST-PUSH inflation. Highly variable inflation makes long term investing extremely risky. 4.Assume the following data apply to a certain country:

Total Population280.4 million
Civilian Noninstitutional Population210.0 million
Employed112.4 million
Unemployed 5.8 million
Not in Labor Force 91.8 million

The unemployment rate is
a.Less than 3.0%
*b.3.0% to less than 5.0%
c.5.0% to less than 6.2%
d.6.3% to less than 7.4%
e.7.4% of higher
ANSWER: Labor force = 112.4 + 5.8 = 118.2. Unemployment Rate = (5.8/118.2) x 100% = 4.91%

5.Last year Joe earned $53,275 in disposable income and his consumption spending was $48,900. This year his disposable income increased by $20,000 and his new consumption spending amounted to $61,500. What is Joe's marginal propensity to consume? a.less than 60%

*b.60% to less than 65%
c.65% to less than 70%
d.70% to less than 75%
e.75% or higher
ANSWER:
Change in C = 61,500 – 48,900 = 12,600
Change in disposable income = 20,000
mpc = change in C/ change in Y = 12,600 / 20,000 = .63 or 63%

6.A person was injured in a car accident. The person will need three different medical treatments one, two, and three years from today. The cost of the first treatments will be $40,000 in one year; the cost of the second treatment will be $32,000 in two years; the cost of the third treatment will be $26,000 in three years. The insurance company has offered to give the injured person a payment today to pay for the three future medical treatments. Assume that at the present time investors can invest money at 4% annual interest elsewhere in the economy. What is the appropriate amount for the insurance company to give to the injured person today. That is, what is the present value of the future cost of the three medical treatments? *a.Less than...
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